Trade War Escalation Lifts The Dollar

(RTTNews) - Trump's tariff threats rattled currency markets during the week ended January 31, lifting the Dollar against most major currencies. The Dollar firmed up against the euro, the British pound, the Australian dollar, the Swedish krona, the Canadian dollar and the Swiss franc. It however weakened against the Japanese yen.

The Dollar Index, a measure of the Dollar's strength against a basket of currencies comprising the euro, the British pound, the Japanese yen, the Canadian Dollar, the Swedish Krona, and the Swiss franc closed trading 0.87 percent higher at 108.37 on January 31 versus 107.44 a week earlier. The week's trading range was much wider, oscillating between the low of 106.97 recorded on Monday and the high of 108.57 recorded on Friday.

As widely expected, the Federal Reserve had on Wednesday held rates steady after delivering 100 basis points of rate cuts in the last part of 2024. As usual, the Fed acknowledged the elevated level of inflation. However, unlike in the previous statements, this time it did so without acknowledging the recent progress made in inflation toward the Committee's 2 percent.

The more-than-expected decline in GDP growth in the U.S also influenced the greenback's trajectory. The U.S. Bureau of Economic Analysis on Thursday showed the U.S. economy expanded at an annualized 2.3 percent in the fourth quarter versus 3.1 percent in the third quarter. With the slowest growth in three quarters, the latest reading came below forecasts of 2.6 percent.

On Friday, the U.S. Bureau of Economic Analysis revealed an uptick in year-on-year PCE price index on expected lines to 2.6 percent from 2.4 percent in the previous month. The core component remained steady at 2.8 percent as expected. The PCE price Index on a month-on-month basis rose as expected to 0.3 percent from 0.1 percent previously. The core component thereof edged up to 0.2 percent from 0.1 percent in the previous month in line with expectations. The uptick in inflation, albeit on expected lines, supported the Dollar amidst a hawkish pause by the Fed on Wednesday.

The euro slipped 1.25 percent against the U.S. dollar during the week ended January 31 amidst the widely expected rate cut by the European Central Bank that contrasted with the Fed's hawkish hold on rates. A dovish ECB on Thursday cut its key interest rates by 25 bps for the first time this year. From the level of 1.0493 on January 24, the EUR/USD pair slipped to 1.0362 by January 31. The weekly trading ranged between the high of 1.0534 recorded on Monday and the low of 1.0350 touched on Friday.

The sterling dropped 0.71 percent against the greenback during the week ended January 31 amidst tariff fears and expectations that the Bank of England would deliver another rate cut next week. The GBP/USD pair slipped to 1.2390 on January 31, from 1.2479 a week earlier. The sterling's weekly trading range was between $1.2525 recorded on Monday and $1.2384 recorded on Friday.

The Australian Dollar plunged 1.55 percent against the greenback during the week ended January 31 amidst a larger-than-expected decline in consumer price inflation in Australia. From the level of 0.6309 recorded on January 24, the AUD/USD pair dropped to 0.6211 in a week's time. The pair touched a high of 0.6324 on Monday and a low of 0.6199 on Thursday.

The USD/JPY pair slipped 0.51 percent during the week ended January 31 as it closed at 155.18 versus 155.98 a week earlier. The pair ranged between the low of 153.72 and the high of 156.26, both recorded on Monday. The rate hike by Bank of Japan and the uptick in Tokyo CPI boosted the Japanese yen.

With President Trump following up on tariff warnings with concrete actions against Mexico, Canada and China, the turbulence in currency markets continues unabated. The move also renewed concerns about global trade, economic growth, and a likely resurgence in inflation. Amidst safe-haven demand, the 6-currency Dollar Index is currently at 109.19 versus 108.37 at close on Friday.

Amidst the escalation in the trade war that has unnerved global markets, the EUR/USD pair plunged further to 1.0261. The GBP/USD pair has declined all the way to 1.2356 ahead of the Bank of England's next interest rate decision due on Thursday. The AUD/USD pair has also slipped to 0.6159. The USD/JPY pair is currently at 154.81 versus 155.18 at close on Friday.